Lachmann on Capital Heterogeneity

We have written often on the role of capital heterogeneity in an entrepreneurial theory of the firm. “We are living in a world of unexpected change,” wrote Ludwig Lachmann in 1956; “hence capital combinations . . . will be ever changing, will be dissolved and reformed. In this activity, we find the real function of the entrepreneur.” Of course, the concept of heterogeneous resources is fundamental to transaction cost and resource-based views of the firm. It is mostly ignored by mainstream economists, however — macroeconomists in particular, as evidenced by the Old School Keynesianism that drives bailout and stimulus policy.

Here is Richard Ebeling with a fine overview of Lachmann’s capital theory, in contrast to Keynes’s superficial treatment:

A crucial element in Lachmann’s view of capital . . . is that the relationships between and among capital goods are those of substitutes and complements.

The Keynesian fallacy, Lachmann implies, is that Keynes tended to view and consider the capital stock has a more or less homogeneous aggregate under which all capital goods might be considered as interchangeable substitutes. Thus, any increase in capital investment lowers the “marginal efficiency of capital” (Keynes’ term) of every other unit of capital, since every unit of capital is a substitute with all other capital. . . .

Thus, if monetary manipulation brings about an increase in money and credit, and a resulting distortion of the rates of interest, and if this generates a tendency for misguided capital and related investments, and as a consequences capital goods and various types of labor are drawn into particular sectors of the economy and “stages” of the time structure of production, then . . .

You know the rest. And the coda too:

Government interventions and “stimulus” gimmicks merely serve to delay the adjustments and further distort an already distorted market. It is an attempt to maintain capital and labor complementary production and investment structures that are unsustainable in many of the patterns generated during the boom phase of the business cycle.